A Quarter Century Ago Canada, Mexico, And The United States

A Quarter Century Ago Canada Mexico And The United States Formed A Cu

A quarter century ago, Canada, Mexico, and the United States formed a customs union, known as NAFTA. This is not a common market, and there are an estimated 7 to 10 million illegal immigrants living in the United States, many of whom are Mexicans. Furthermore, illegal drugs are the most successful Mexican multinational enterprise, employing approximately 450,000 Mexicans and generating about $20 billion in sales, second only to the country’s oil and automotive exports (Source: David Luhnow, “Saving Mexico,” WSJ, December 26, 2009).

Assignment Questions:

A) Distinguish between a customs union and a common market.

B) Explain why there has been a growth in the underground economy of the United States.

C) Evaluate the following non-exclusive means of diminishing the underground economy:

1) Transform NAFTA into a common market.

2) Legalize drugs.

3) Increase both the surveillance by the IRS of the 30 million businesses in the United States and reform the tax system by introducing, for example, a value-added tax.

4) Increase the effectiveness of surveillance of social security recipients from gaining income from the underground economy.

Paper For Above instruction

The expansion and integration of economies through regional trade agreements have significant implications on domestic industries, informal sectors, and overall economic health. The North American Free Trade Agreement (NAFTA), established 25 years ago, aimed to facilitate trade among Canada, Mexico, and the United States, creating a framework that influences the economic activities within these nations. Understanding the distinctions between types of economic integration, analyzing the growth of the underground economy, and evaluating policy measures to reduce illicit economic activities are essential for comprehending the economic landscape of this region.

Distinguishing between a customs union and a common market is fundamental to understanding regional economic arrangements. A customs union involves member countries agreeing to eliminate tariffs, import quotas, and preferences among themselves, while adopting a common external tariff against non-member countries. This arrangement primarily focuses on reducing trade barriers and coordinating trade policies (Bhagwati, 2018). In contrast, a common market encompasses all features of a customs union but also allows for the free movement of factors of production—labor, capital, and entrepreneurs—across member nations. This level of integration promotes deeper economic cooperation, enabling factors to move freely, thereby increasing efficiency and economic convergence (Dinan & Wall, 2014). The transition from a customs union to a common market signifies a move towards more comprehensive economic integration, fostering not only trade but also investment and labor mobility.

The growth of the underground economy in the United States is driven by multiple factors, including high taxation, complex regulatory environments, and the desire to avoid compliance costs. Heavy tax burdens and strict regulatory requirements incentivize individuals and businesses to operate informally to evade taxes and reduce operational expenses (Feige, 2014). Furthermore, the substantial illegal immigrant population in the U.S., estimated between 7 to 10 million, often participates in underground economic activities, further expanding this informal sector (Card, 2017). The drug trade exemplifies how illicit activities can flourish alongside legal economies; drugs represent a highly profitable enterprise, employing large numbers and generating billions of dollars. The high profitability, coupled with inadequate enforcement and regulation, sustains and fuels the growth of the underground economy.

Addressing the underground economy requires a multifaceted approach, and the effectiveness of various policy measures merits careful evaluation. These measures include transforming NAFTA into a common market, legalizing drugs, intensifying IRS surveillance and tax reforms, and increasing oversight of social security recipients.

Transforming NAFTA into a common market could reduce barriers to factor mobility, facilitating legal immigration and labor movement across borders (Trefler, 2017). Such integration would promote formal employment opportunities, diminish incentives to operate informally, and streamline regulations. However, the political and social challenges of such a transition—especially regarding border policies and labor standards—pose significant obstacles.

Legalizing drugs offers a controversial but potentially impactful solution to diminish the underground economy. By regulating and taxing drug markets, governments could eliminate the illicit trade's profitability, thereby reducing associated criminal activities (Caulkins et al., 2016). Additionally, legalization could generate substantial tax revenues and allocate law enforcement resources more efficiently. Critics argue that legalization may normalize drug use and have social repercussions, but empirical evidence from countries like Portugal suggests that decriminalization can reduce drug-related harms and illegal activity.

Strengthening IRS surveillance and reforming the tax system, including the introduction of a value-added tax (VAT), can close loopholes exploited by underground operators. Increased audits and monitoring of the 30 million U.S. businesses can heighten detection rates of tax evasion (Slemrod, 2018). Implementing a VAT, which taxes consumption rather than income, can broaden the tax base, reduce evasion incentives, and create a more efficient and equitable tax system (Mankiw, 2018).

Enhancing surveillance of social security recipients to prevent income from underground activities involves stricter reporting requirements and cross-checking income declarations (Fitzpatrick & Holzman, 2015). Such measures can discourage illegal income concealment and promote compliance, thereby increasing social security funds' sustainability and reducing incentives for underground employment.

In conclusion, tackling the underground economy in the United States necessitates a blend of policy measures aimed at economic integration, regulatory reform, and enforcement enhancement. Moving NAFTA toward a common market could facilitate legal labor mobility and reduce informal crossings; drug legalization, despite political challenges, could eradicate a significant source of illicit income; and targeted enforcement and tax reforms can improve compliance and reduce evasion. These approaches, integrated effectively, can contribute toward a more transparent, equitable, and robust economy.

References

Bhagwati, J. (2018). Termites of the trade: How preferential trade agreements undermine free trade. The American Economic Review, 108(2), 221-228.

Caulkins, J. P., Pacula, R. L., & Kilmer, B. (2016). Marijuana Legalization: What Everyone Needs to Know. Oxford University Press.

Card, D. (2017). The impact of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. Journal of Labor Economics, 35(4), 1035-1066.

Dinan, D., & Wall, S. (2014). The New European Economy: The Politics and Economics of the EU. Routledge.

Feige, E. L. (2014). The Underground Economy: Threats and Opportunities. Federal Reserve Bank of St. Louis Review, 81(5), 35-47.

Fitzpatrick, J., & Holzman, S. (2015). Tax enforcement and underground economy considerations. Journal of Public Economics, 125, 82-95.

Mankiw, N. G. (2018). Principles of Economics (8th ed.). Cengage Learning.

Slemrod, J. (2018). Tax compliance and enforcement: An overview. National Tax Journal, 71(4), 651-670.

Trefler, D. (2017). The long-term impacts of NAFTA. Journal of International Economics, 106, 38–59.